It's great to have cash in the bank, until you realise you still can't make payroll next month. One tool that businesses can use to address this problem is the working capital ratio. This metric is a powerful yet overlooked indicator of how a business is really doing: it cuts through profit margins and revenue peaks and looks directly at whether you can pay your bills.

Below, we'll explain what the working capital ratio is, how to calculate it and how you can improve it without creating other problems for your business.

What's in this article?

• What is the working capital ratio?
  
• How do you calculate working capital ratio?
  
• What's considered a good working capital ratio?
  
• How can you improve your business's working capital ratio?
  
• How Stripe Capital can help
  

What is the working capital ratio?

The working capital ratio is a quick way to check whether your business can cover its short-term bills. It compares what assets can be converted into cash in the next year to what you owe in the same time frame. You calculate this ratio by dividing your current assets by your current liabilities. For example, if your current assets total £150,000 and your current liabilities are £100,000, your working capital ratio is 1.50. In other words, you have £1.50 available for every £1.00 you owe.

While working capital is a dollar amount (calculated as current assets minus current liabilities), the working capital ratio is a proportion. If you have £250,000 in assets and £200,000 in liabilities, your working capital is £50,000 but your ratio is 1.25. The ratio format is especially useful for comparing companies of different sizes or tracking your liquidity over time.

How do you calculate working capital ratio?

The working capital ratio has a straightforward formula:

Working Capital Ratio = Current Assets ÷ Current Liabilities

Current assets include all resources you expect to convert to cash within 12 months, such as:

• Cash and cash equivalents
  
• Short-term investments
  
• Accounts receivable (i.e. unpaid customer invoices)
  
• Inventory
  

Current liabilities are all obligations due within 12 months, such as:

• Accounts payable (i.e. bills you owe)
  
• Short-term loans
  
• The current portion of long-term debt
  
• Accrued expenses (e.g. taxes, interest payments)
  

To find your working capital ratio, divide total assets by total liabilities.

What's considered a good working capital ratio?

A working capital ratio between 1.50 and 2.00 is generally considered healthy, although it can vary depending on the industry. This range usually means you have enough short-term assets to cover your short-term debts and a buffer that gives you flexibility.

Here's a closer look at what different working capital ratios mean:

• Below 1.00: You owe more than you own in the short term. That's often a warning sign. You might experience cash flow trouble unless you have outside funding or an unusually fast revenue cycle.
  
• Around 1.00: You're technically solvent, but there's no room for error. If a customer pays late or you face a surprise expense, you could come up short.
  
• 1.50–2.00: This typically signals a healthy position. You can pay your bills and still have cash to stock up on inventory, cover a slow month or seize a new opportunity.
  
• Above 2.00: You're in safe territory but potentially inefficient. If you're sitting on excess cash, unsold inventory or slow-moving receivables, that high ratio might be hiding underused resources that could be deployed more productively.
  

Context matters. What's considered "good" depends on your industry, business model and how quickly money moves through your system.

Here are some examples:

• Grocery stores and fast-fashion retailers can often operate just fine with a ratio under 1.00, since these industries have fast inventory turnover and near-instant customer payments. Cash comes in quickly, and it's common for suppliers to offer generous payment terms.
  
• Manufacturers, contractors and B2B service providers typically need a higher ratio. They might pay for labour and materials long before they collect payment, which means they need a stronger liquidity buffer.
  

You should compare your ratio to those of peers in your industry and understand why your number looks the way it does. A 1.20 could be solid for a certain business but shaky for another, depending on how cash flows, how reliable receivables are and how fast inventory sells.

This metric also has its limitations. It doesn't show whether your assets are truly liquid or whether your liabilities are growing faster than expected. Some companies also track their quick ratios, which exclude inventory and other slow-to-convert assets for a more conservative view.

How can you improve your business's working capital ratio?

Since the working capital ratio equals current assets divided by current liabilities, you can improve it by either increasing what you have on hand or decreasing what you owe in the short term.

Here's how businesses accomplish this without compromising growth or cash flow.

Increasing current assets

• Get paid faster: The longer invoices sit unpaid, the more likely they are to become bad debts (i.e. money owed that will never be paid). Invoice promptly and consistently, use automatic reminders and clear terms and enforce due dates or incentivise early payment. Tools like Stripe Invoicing help you automate this work so you're not chasing down payments manually.
  
• Move inventory faster: Look at turnover metrics. If certain stock-keeping units (SKUs) sit too long, discount or liquidate them. Keep stock lean and responsive.
  
• Forecast cash flow: Build short-term projections so you can see when inflows might slow or expenses might peak. This lets you plan. You can pull back on spending, slow restocks or arrange short-term financing before liquidity tightens.
  

Reducing current liabilities

• Cut unnecessary expenses: Review your operating costs. Find what's bloated or underperforming and trim where doing so won't hurt. Refining even small recurring expenses can free up cash.
  
• Stretch your payables: If your vendors give you 30 days, use all 30. Paying too early might feel responsible, but it drains cash you could be using elsewhere. Some suppliers might even extend terms if you have a solid track record. Just don't push so far that you hurt relationships or your credit.
  
• Refinance short-term debt: If your ratio is sagging under near-term liabilities, talk to your lender. Shifting a portion of your short-term debt into a longer-term structure can ease the current load and improve your ratio.
  
• Tap into working capital financing: If you need a short-term boost, options such as a business line of credit and revenue-based financing can increase your current assets fast.
  

How Stripe Capital can help

Stripe Capital offers eligible businesses working capital financing based on their payment volume, with automatic repayment through a fixed percentage of future sales.

Capital can help you do the following:

• Access growth capital faster: Get approved for a loan or merchant cash advance in minutes, without the lengthy application process and collateral requirements of traditional bank loans.
  
• Align financing with your revenue: Capital's revenue-based structure means you pay a fixed percentage of your daily sales so payments scale with your business's performance. If the amount you pay through sales doesn't meet the minimum due each payment period, Capital will automatically debit the remaining amount from your bank account at the end of the period.
  
• Expand with confidence: Fund growth initiatives such as marketing campaigns, new hires, inventory expansion and more, without diluting your equity or personal assets.
  
• Use Stripe's expertise: Capital provides custom financing solutions informed by Stripe's deep expertise and payment data.
  

Learn more about how Stripe Capital can fuel your business growth or get started today.